Entries from May 2018 ↓

Given next Thursday’s slugfest in Ontario, plus BC’s latest witch hunt, this blog post was supposed to tell you why landlords are about to be broiled on a spit. But, alas, events have overtaken things. Let’s save the weenie roast for tomorrow.

So, how do you like the Trumpster now?

The American president on Thursday went all bully and slapped big tariffs on metals from Canada, Mexico and Europe. In immediate reaction these allies retaliated. Now we have a trade war. Good work, Don.

Stock markets in the US fell because this makes imports more expensive, hurts companies and costs jobs. The Canadian dollar swooned on the news and never recovered. Bonds went up and investors despaired just a day after the Italian thing toppled equities.

Incredibly, Trump’s White House says erecting trade barriers to its North American allies (to block stuff the US also produces) is a ‘national security’ issue. It’s not, of course. This is designed to blow up NAFTA – which now has a zero chance of being ratified in 2018 – and plays to the alt right Republican base of knuckle-draggers who think protectionism will bring back 1966. That’s not going to happen, either. Just ask Harley, an iconic American manufacturer that this week punted thousands of workers – in part because of the rising price of imported materials.

Protectionism flows from nationalism and jingoism. From there it’s a short trip to intolerance and the sentiment that makes Trump defenders want to build a Mexican wall, ban Muslim immigrants and leave post-hurricane Puerto Rico in desperate shape. Most of all, it’s bad economics. Trade barriers make things more expensive to produce and buy. Consumers have less buying power so when 70% of the US economy is based on consumer spending, this is some dumb. Meanwhile there’s no evidence taxing Ontario steel or Quebec aluminum will create a single job in Michigan or Ohio. But Trump says otherwise. And the rabble cheers. So Canadian ‘retaliation’ is pointless. The president cares not.

Ottawa’s response is not strategic, unlike that of Mexico. Those guys targeted products in US electoral districts where Republicans have a fight on their hands this November. We didn’t. We also blew the NAFTA talks by making gender equality our big demand. You can imagine how that went over.

Meanwhile, consider the growing divide between the nations. We’ve raised taxes and created a new super tax bracket for the wealthiest (who, by US standards, aren’t rich at all). The US dropped personal tax rates. We raised taxes on corporations. They reduced them. We just nationalized a pipeline company. The US reduced regs covering the oil and gas business. We’re adding a carbon tax to everything. They punted the Paris Accord. Household debt in Canada is going up, while in the US it’s been falling. Soon we may have two-thirds of our economy controlled by socialist governments. Their governing party eats nails.

So, what next?

This will not deter the Bank of Canada from raising rates. In fact, it makes that event more likely since the dollar will now be under continual pressure and needs the juice. Second, tariffs, barriers and numbnuts foreign leaders are inflationary – these things increase the cost of goods and services and reduce productivity. Central bankers hate that.

Second, NAFTA is kaput. Now. Maybe forever – until populism and protectionist drain away in Washington. Bad news for Hamilton and the Sault, along with Sept-Iles, and the real estate markets surrounding them as steel and aluminum are hit. In the Trump crosshairs also is vehicle production with another 25% proposed tariff.. Yup, Oshawa and Windsor. Brampton, Barrie and Woodstock. Bye-bye.

Those people who come here to praise the American leader as a visionary, iconoclast and an everyman propelled by common sense and courage are backing a myopic bully. No wonder he likes Putin and Kim, hates a free and inquisitive media and can’t keep employees. The danger he now poses to global growth – just recently struggling back from its knees – is palpable. Ironically, he’s not helping America either by whacking Canada.

Interest rates will be rising in six weeks – the fourth increase in about a year. The cost of money will rise again after that, likely on October 24th. Don’t say you weren’t warned in advance.

The prime rate will be 3.95% by Christmas. The benchmark qualifying rate for the mortgage stress test will be 5.84%, and HELOC owners will get a letter telling them the cost of their demand loans will be upping to almost 6%. This isn’t idle conjecture, and here’s why…

The Bank of Canada poodles understand they cannot get too out of step with the US Fed, which is full of snappy pitbulls keen to reverse nine years of accommodative money policy and reign in an economy thumping along on Trumpian testosterone. American rates have increased five times in about a year with two more to come in 2018. Without keeping pace, our dollar is whacked, stoking prices and inflation.

Speaking of rising prices, the poodles said this on Wednesday: “Overall, developments since April further reinforce the governing council’s view that higher interest rates will be warranted to keep inflation near target.” The target is 2%, and we’re already over that – with decent economic growth, the best job creation in years, outtacontrol gas prices and a booming American economy. The enemy of central banks for years was deflation. Now it’s all different.

Then there’s real estate. It’s cooling, of course, with a collapse in new house sales and a serious decrease in transactions in major markets. But what the central bank cares about is persistently high prices (inflationary) and mounting household debt. Because Canadians lost their minds and decided to buy what they couldn’t afford by financing it, high house prices and tighter mortgage regs have failed. Debt ratios are still epic. The only real brake will be the cost of borrowing, So, up she goes.

And how about T2? The dude pulled a Pierre this week and bought a pipeline company. The $4.5 billion earmarked for the Kinder Morgan deal – to be organized by a new Crown corporation full of civil servants with DB pensions – is just a start. The final cost could be two or three times that and you can be sure the CPP Investment Board will be strong-armed into ponying up a pile of cash. Good thing all the moisters today are financially self-sufficient and won’t need pensions.

The pipeline deal is inflationary, of course. Billions will have to be financed, then poured into a construction project creating 15,000 construction jobs and 37,000 direct and indirect jobs per year of operation. That’s all great and good, but it’s the kind of massive activity central bankers focus on. Mega-projects – especially ones sucking on the government teat – have consequences.

So there’s this cocktail of factors the bank is convinced will emerge. Sustained strong US growth, thanks in part to the Trump tax cuts. Higher oil prices as the global economic expansion continues (growth has gone from 0% to about 4%). Improving Canadian exports. The best wages in six years (up 3.6%). Ontario’s march to a $15 minimum wage, jacking the price of retail goods and restaurant meals. BC’s massive increase in real estate-related taxes – soon (maybe) to be repeated by the Dippers in the East. And the creation of 378,000 new full-time jobs in the past 12 months. The bank also says that, despite higher mortgage costs, it expects the residential real estate market to rebound.

Whether all this happens or not as expected is moot. The central bank has stated clearly this week that rates will be higher on the afternoon of July 11th and more will follow.

The main reason, then?

Simple. To stop the borrowing. If it continues, we’re pooched, if a state of poochiness has not already been achieved. The increase in household debt needs to be choked off. And I’m betting it will.

To those who have said the cost of money cannot rise because nobody could afford it, you’re wrong. With the mortgage stress test at close to 6% this year, it’s clear that’s not what the poodles fear most.

Canadians have proven they can’t handle credit when it’s cheap and plentiful. God help us when the same happens to weed.

Garth’s Instagram Posts

The views expressed are those of the author, Garth Turner, a Raymond James Financial Advisor, and not necessarily those of Raymond James Ltd. It is provided as a general source of information only and should not be considered to be personal investment advice or a solicitation to buy or sell securities. Investors considering any investment should consult with their Investment Advisor to ensure that it is suitable for the investor's circumstances and risk tolerance before making any investment decision. The information contained in this blog was obtained from sources believed to be reliable, however, we cannot represent that it is accurate or complete. Raymond James Ltd. is a member of the Canadian Investor Protection Fund.